In This Article

  1. What Is A Real Estate Note?
  2. What Is Real Estate Note Investing?
  3. The Contract For Deed vs. Mortgage
  4. Types of Real Estate Mortgage Notes
  5. Where Can You Buy Real Estate Notes?
  6. Real Estate Note Investing

Do you want to invest in real estate, but you don’t want to deal with the hassle of buying, selling or managing a property?

There is one type of real estate investing that provides passive income, the opportunity to focus on the business side of real estate investing, and does not require maintaining a property

This is called real estate note investing. 

What Is A Real Estate Note?

Before we get started on real estate note investing, let’s first explain what a real estate note is. 

Keep in mind that the term “real estate note” may also be referred to in some circles as a “mortgage note”. 

When someone buys a property but doesn’t have the means to pay cash for it, he or she will be asked to sign a mortgage and a promissory note by their lender. The buyer will then pay part of the price as a down payment, but will be required to sign legally binding documents that require them to pay the remaining amount off over time. 

Promissory notes are essentially a contract that the buyer signs where he or she guarantees to repay their debt.

What Is Real Estate Note Investing?

Now that we’ve explained a real estate note, let’s look at real note investing, also referred to as “note investing” and “investing in mortgage notes”. 

Note investing is the process of purchasing the debt and its security instrument. 

Note investing is the process of purchasing the debt and its security instrument. 

Once you invest in a mortgage note, you become the lender, which means that you begin collecting payment from the borrower. 

Typically, those who participate in investing in notes do so by purchasing these notes at a discounted rate. This allows the investor to make more money than they invested when the borrower pays them back the full amount they had originally agreed to pay.

Next, we will look at the advantages and disadvantages of note investing. 

The Contract For Deed vs. Mortgage

When engaging in note investing, you will undoubtedly encounter the terms “deed” and “mortgage.” 

What does each one mean? 

And what’s the difference?

A traditional mortgage contract involves only two parties — the borrower and the lender. These mortgages are very simple investments, given that you simply need to purchase the agreement from the lender.

Deeds can be a bit more complicated because they involve three parties. 

A deed is a contract between:

  • a borrower (trustor) 
  • lender (beneficiary)
  • and a trustee

The trustee holds the title to the real estate and can sell it if the borrower defaults. 

As you can imagine, investing in mortgage notes is a bit more challenging when you have to negotiate with both a lender and trustee.

Types of Real Estate Mortgage Notes

Types of Real Estate Mortgage Notes

Before you begin investing in mortgage notes, it is crucial to understand the several types of notes available. Generally, notes will be classified as performing or non-performing. 

Performing Note

A performing note is progressing as expected, meaning that the debtor is making payments on time and is not in default. 

Non Performing Note

If a note is non-performing, then the debtor is behind on payments. If the debtor is over 180 days overdue on payments, then the mortgage note is in default.

Advantages of Real Estate Note Investing

Advantages of investing in mortgage notes includes:

  • Passive income
  • Lower recurring expenses since investors don’t have to pay real estate agents or property managers 
  • An opportunity for the investor to make a higher return on investment, since he or she will be able to control the interest rates of the loan

Disadvantages of Real Estate Note Investing

Investing in real estate notes also carries with it its share of risks. These risks include:

  • The chance of the homeowner defaulting on the loan, putting the note investor at risk of losing money
  • The property can go to auction, and the investor might lose money if the property sold for less than they paid for the note
  • It can be challenging to measure the profitability of investing in mortgage notes accurately
  • Notes are not insured by the Federal Deposit Insurance Commission

Where Can You Buy Real Estate Notes?

Where Can You Buy Real Estate Notes?

There are several options both locally and online if you’re looking to buy real estate notes.

Buying Real Estate Notes Option #1: Local Bank

If you want to work with a bank you have an existing relationship with, you can often speak to them about their interest in selling any of their currency notes.

Buying Real Estate Notes Option #2: Online

You can also find a host of websites that allow you to invest in real estate notes online, such as NotesDirect.

Buying Real Estate Notes Option 3: Note Funds

Another option is to engage in note investing as part of a larger fund. 

The two primary types of funds are:

  • private equity funds 
  • hedge funds

Regardless of which fund you partner with, the basic premise is the same.

When contributing to a fund, the goal is to pool your money with other investors. The combined assets of multiple investors allow you to acquire a share of a group of loans from large financial institutions.

Before you buy notes, it’s essential to research your options and choose the one that will not only provide you the greatest return on investment, but it's right for you and your investment goals. 

Note Investing Strategies

Once an investor purchases a note, there are several strategies he or she can use to make a profit. This includes:

  • buying the note, holding it and making money from the payments
  • flipping the mortgage note by partially selling it
  • buying a non-performing note and becoming the owner of the primary lien against the property

Real Estate Note Investing

Investing in mortgage notes provides an opportunity to make money in real estate without the headaches of property management

As is the case with any type of investing, investing in mortgage notes comes with risk. 

Before getting started, it’s important to continue your education so that you can minimize your risk and maximize your profit.